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Spring approaches and with it the end of Q1 (thankfully). January is when folks tend to put away their wallets and try to sleepwalk through the hangover of holiday spending.
February also made life interesting for many DTC brands, and not just because it was a leap year. Weird Meta behavior, including random overspending despite cost caps and budget protections, hit many accounts without explanation. Make sure to accost your Meta rep (assuming you have one) if you saw your account go off the rails last month.
At least winter is almost over, right?
This week:
The Saas Price squeeze. Better deals on the horizon?
Contribution margin. The new North Star metric for DTCs.
Cost controls vs highest volume/lowest cost. Philosophy or science?
Quick news and tips hits. For those in a bit of a rush.
Let’s dive in.
The SaaS price squeeze
As DTC margins shrink there has been a general outcry against SaaS pricing. An effective tech stack is a must when it comes to Ecommerce, but the effect on the balance sheet can be death by 1,000 cuts. It is especially pernicious when tools’ costs creep up thanks to things like cost per seat or percentage of revenue pricing models. Or just plain ol’ year-over-year increases.
Greg Isenberg suggested a new model: (paraphrased) “Instead of 80% of the features for 90% discount, how about 100% of the features at a 95% discount?”
He’s got a point. SaaS companies got used to taking an ever-growing percentage of their customers’ revenue during the frothy good times. But those times are over.
Take away: DTC operators - keep an eye on your tech stack pricing and look for new competitive platforms entering the market. Maybe even try negotiating with your current platform. If they’re smart, they’ll be open to it. As for SaaS platforms, they’ll need to work hard to differentiate themselves, bring more value, and find other ways to lock in their clients.
Contribution margin becomes a North Star
Topline growth as the primary objective has gone the way of the dodo. Money isn’t free anymore, so living on debt or venture capital and betting on a “5-year LTV window” is a brand killer.
In his new series on bridging marketing and finance, Taylor Holiday says most DTC companies are making this one mistake - not checking their new customer contribution margin. But this begs the question: is first purchase profitability a must?
Jai Dolwani thinks so. Companies used to work with now-ludicrous 20-year LTV:CAC horizons, but money isn’t cheap anymore, post-pandemic customer online spend is down and IOS14 privacy has hampered Meta ad efficiency.
The mechanisms that justified long runways to profitability are gone.
Take away: Inflation + expensive money + lower ROAS = pensive customers and higher costs. Get ruthless about efficiency + profitability. You need a clean P&L every month to make it as a brand these days.
Cost controls vs highest volume/lowest cost - the ongoing performance marketing war
Almost every DTC brand advertises on Meta. The “Facebook tax” is a thing because Mark Zuckerberg has built the single most powerful advertising platform in the world. That makes leveraging Meta powerful. But not easy.
Media buyers know that one of the ongoing battles in DTC marketing is cost caps vs highest volume bid strategies.
Let’s hear from the “nay” side first:
Olivia Kory weighed in recently hypothesizing that bid/cost caps will only net you the customers most likely to buy anyway.
Barry Hott agrees with Olivia’s take in that “caps scrape the least incremental sales that are already bound to happen, especially for larger brands”.
Caps limit spending and thus the insights derived from experimentation.
Their natural and algorithmically driven variation makes it difficult to correlate cause and effect (for instance, you may not see any variation after changing your landing page).
And now for the pro side. Barry nevertheless credits Andrew Faris and Dave Rekuc for opening him back up to caps for lower budget, more short-term conscious accounts.
Andrew, a champion of the pro-caps faction, disagrees with Olivia and Barry’s idea that caps only capture low-hanging fruit.
Taylor Lagace from Kynship says they’re great for throwing a ton of creatives at and letting the algorithm find the winners.
Although he is known as a staunch anti-cost capper, Charley T takes a more nuanced view in this comprehensive breakdown of how to make them work for your business.
Charley’s take? Yes, caps capture existing intent. This works well for big brands with many other traffic generators. They make ads depreciate in effectiveness over time, but they’re great at lowering CPAs. Overall, rely heavily on lowest cost, and balance it out with some caps to lower the CPA, making the lowest cost ads run more efficiently in return.
The takeaway: cost controls vs lowest cost/highest volume is probably not a true binary. Like almost everything else in DTC marketing, knowing when and how to use cost caps likely comes down to testing what works for your brand.
Quick hits
Thrasio, a top Amazon aggregator, filed for bankruptcy on Wednesday. Amazon aggregators raised billions from investors hungry to cash in on the third-party rollup craze. Now, as e-commerce has taken a hit, they are tanking.
Google is the first big AI company to buy the rights to access Reddit’s entire database of content. Their statement: “With the Reddit Data API, Google will now have efficient and structured access to [...] enhanced signals that will help us better understand Reddit content and display, train on, and otherwise use it in the most accurate and relevant ways”. Sounds like a plan to improve their ads on the platform.
Drew Fallon digs into Gymshark’s financials in this fascinating breakdown thread. Check out that media efficiency ratio.
If you’re DTC and thinking about big-box retail, check out what Mike Beckham learned while scaling Simple Modern to 9 figures in places like Walmart.
Ridge Wallet recently brought on Youtuber Marques Brownlee as Chief Creative Partner. With the growing influence of independent creators and influencer marketing, look for brand/creator partnerships like this to become more popular.
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